Secular inflation is a policy outcome, not an accident. Continuous government spending, debt monetization, and policies aimed at preventing any reduction in aggregate demand are the primary drivers, counteracting the natural deflationary pressures of a crisis and embedding inflation.

Inflation from a supply disruption, like an oil price spike, will eventually fade. It only becomes persistent and embedded in the economy if governments try to 'help' consumers pay for higher costs with stimulus checks, which increases the broad money supply.

Contrary to narratives about excess demand, the recent inflationary period was primarily driven by supply-side shocks from COVID-related disruptions. Evidence, such as the New York Fed's supply disruption index accurately predicting inflation's trajectory, supports this view over a purely demand-driven explanation.

While events like the pandemic, the Ukraine war, and the Iran conflict are individually unique, their rapid succession conditions the public to expect continuous price shocks. This transforms transitory inflation into a deep-rooted psychological problem for central banks, as people stop seeing these events as isolated.

The textbook response to supply-shock inflation is to "look through" it and hold rates. However, one expert argues that after five years of high inflation, the sheer duration creates a risk of it becoming embedded. This "duration risk" could override the cause, forcing the Fed to tighten policy as a risk management measure.

It's the volatility and unpredictability within the supply chain environment—rather than the magnitude of a single shock—that can dramatically amplify the inflationary effects of other events, like energy price spikes. This suggests central banks need situation-specific responses.

The increasing use of economic tools like tariffs and investment controls for foreign policy goals—termed "economic statecraft"—means negative supply shocks are no longer random. They are now a structural feature of the global economy, making inflation more persistent.

Policymakers, scarred by post-COVID inflation, risk tightening monetary policy excessively in response to energy price surges. History suggests these shocks are temporary and primarily affect headline, not core, inflation. The greater danger is stifling economic growth by overreacting to a transient inflationary impulse.

An oil supply shock initially appears hawkishly inflationary, prompting central banks to hold or raise rates. However, once prices cross a critical threshold (e.g., >$100/barrel), it triggers severe demand destruction and recession, forcing a rapid policy reversal towards aggressive rate cuts.